Debt dynamics recast

China's approach is becoming more in keeping with international practices as it learns from experience

The African debt issue is an important topic in global governance and international development cooperation. The outbreak of the COVID-19 pandemic in 2020 exacerbated the liquidity crisis and development challenges faced by African countries. External shocks such as the Ukraine crisis and interest rate hikes by developed economies have further complicated the African debt situation. The Debt Service Suspension Initiative proposed by the G20 and the Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative provide a collective solution for the international community to address the debt issues of developing countries.

The ongoing changes in the international development finance environment in Africa have created new dynamics in international debt relief efforts. With changes in the structure of external debt holders to African countries, emerging creditors such as China and private creditors have played an increasingly significant role in African debt relief, while the resources for debt relief available to traditional international debt governance mechanisms have significantly dropped.

In 2010, the Paris Club creditors accounted for 25 percent of the long-term public external debt in sub-Saharan Africa. By the end of 2017, the creditor's share had decreased to 5 percent. Meanwhile, the share of private financial institutions, including bonds and commercial banks, from the Paris Club countries has been rapidly increasing. Private lenders have surpassed multilateral financial institutions to become the largest source of Africa's overall external debt, which has made sovereign debt restructuring more complex and challenging. China has been playing an increasingly important role in the international debt governance system, as Beijing has gradually become the main source of bilateral external debt for African countries and has been pushing the development of the international debt governance system in a more diversified direction. China's practices, experiences, and contributions to debt relief in Africa have become an important part of the international debt governance system.

However, some countries continue to play up the "debt trap" narrative out of their ideological thinking and purposes for major-country competition, blaming China for African debts and ignoring China's significant contributions in addressing the issue. By stoking "debt burden" and "China's responsibility" theories, they disregarded China's important role in international debt relief efforts, and launched a moral crusade against China.

Since the independence of African countries, China has extended active support to their development through aid, loans, and economic cooperation. The construction of the Tanzania-Zambia Railway, supported by interest-free loans and participation from China, is a milestone. Since 2000, under the framework of the Forum on China-Africa Cooperation, China has supported Africa's economic recovery through development cooperation, including debt relief, and has supported African countries in achieving the United Nations Millennium Development Goals. China has played its due role in global debt relief actions for Africa through international initiatives such as the Heavily Indebted Poor Countries Initiative. Since 2014, China has seen more diversification in entities and loan types in its financing for African countries. Chinese financial institutions have placed greater emphasis on the sustainable management of debts, and their debt disposal to African countries has become more market-oriented, professional, and in keeping with international practices.

On the one hand, Beijing has begun to learn from international experiences and practices, emphasizing the need for financing support and economic growth to reinforce each other and give greater priority to financing management. On the other hand, China has developed an approach and characteristics that differ from traditional debt relief mechanisms like the Paris Club. China primarily offers debt relief through bilateral means, while the Paris Club focuses on collective debt relief. China tends to handle debt relief on a case-by-case basis, whereas the Paris Club operates on a country-by-country basis. For example, China, in response to impacts of commodity prices and economic slowdown on African countries, has flexibly carried out debt disposal for countries such as the Republic of Congo, Ethiopia, Djibouti and Angola. Besides, China prefers flexible debt relief measures that do not involve principal reduction, also known as a haircut, while the Paris Club is more inclined to support restructuring plans that involve reduction.

Although there are significant differences in debt relief approaches between China and the Paris Club countries, it should be acknowledged that China's involvement in debt relief is an evolving process. Currently, China is cooperating with creditors, including the Paris Club countries, under initiatives such as the Debt Service Suspension Initiative and the Common Framework. The interaction between China and international creditors regarding the rules, norms, and methods of debt relief is strengthening.

Beijing has not only emphasized debt relief to Africa through international multilateral frameworks but also attached importance to pragmatic bilateral debt relief arrangements with African countries. China provides direct debt relief to African countries and places significant emphasis on comprehensive, sustainable and effective development cooperation to improve their debt situation.

China's loans to Africa play an important role in supporting African countries in addressing their debt problems and meeting development challenges. The rapid growth of China's loans to Africa in the first decade of the 21st century is rooted in the strong financing demand of African countries as they emerged from the "lost decade" and the drop in international funds flowing into Africa due to debt crises. Therefore, China's financial support to Africa has played a crucial role in helping them tackle debt and development challenges from the very beginning. China has also taken into account the actual needs and conditions of African countries, focusing on the developmental effects of the loans it has issued. China's loans to Africa mainly concentrate on infrastructure and other sectors that can deliver tangible economic benefits, such as transportation, power grids, mining, water resources, and information communication. The loans have played a significant role in promoting African countries' economic transformation. Additionally, China took the lead in channeling to African countries $10 billion from its share of the International Monetary Fund's new allocation of Special Drawing Rights, a move that made China the country that has channeled the highest proportion of its SDRs to Africa.

The economic recovery and debt prospects of African countries still face a high level of complexity and uncertainty. African countries not only need timely and robust debt relief arrangements but also require new fiscal stimulus and external financial support. Moreover, intensified geopolitics and competition among major countries exacerbate the deficit in global governance and continue to politicize development issues such as debt relief, thereby limiting effective cooperation in debt assistance. Under the influence of these factors, the international debt governance system is undergoing a profound transformation, and China's interaction with traditional creditors is entering uncharted waters.

Therefore, China should strengthen its financing management, and enhance coordination in debt governance. China should also proactively respond to international concerns and systematically advance communication with multilateral financial institutions such as the IMF and other creditors in terms of approaches and solutions for debt governance, and assume a more proper role in effective debt disposal.

The author is a senior research fellow and the deputy director at the Center for West Asian and African Studies at the Shanghai Institutes for International Studies. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn