China slows down debt relief, shows support for multilateral approach: Report

A report by Rhodium Group, on Thursday (June 29) showed that the value of Chinese debt relief dropped by more than 50 per cent between 2021 and 2022. This comes as Beijing, the world’s largest bilateral creditor, has recently backed more multilateral efforts to standardise support for poor nations.

The report about Chinese debt relief

According to the report, new sovereign debt negotiations and zero-interest loan write-offs which involved Chinese creditors totalled $9 billion in 2022, which is a decline from the previous year’s $19 billion.

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Notably, 2021 also witnessed a large volume of deferrals by Beijing during the final year of the Debt Service Suspension Initiative (DSSI), which China decided to participate in at the beginning of 2020, as well as new negotiations under the Group of 20-led “Common Framework”.

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However, this number only stands at $1.7 billion through April 2023 which is a total drop of over 90 per cent, according to Reuters. This comes as China is seen as a central figure in making meaningful progress in providing debt relief to emerging economies through the Common Framework as well as the World Bank and International Monetary Fund (IMF).

Beijing’s multilateral approach?

The Rhodium Group’s report also noted how “China’s decision to participate in the DSSI…was a substantial development, and reflected the recognition by Chinese lenders and policymakers that China cannot address sovereign debt issues unilaterally.”

While Beijing’s participation in DSSI was not a “complete paradigm shift,” China has been backing more multilateral efforts recently, noted the report.

The Rhodium Group’s report, published on Thursday, also found that China has extended support to multilateral initiatives set up during the COVID-19 pandemic making the process of helping countries back on their feet faster and simpler.

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While Chinese officials have reportedly continued to negotiate suspension agreements bilaterally and debt relief has been concentrated in a couple of countries. As the data by the independent research provider shows, almost two-thirds of total deferrals were given to Angola alone.

Meanwhile, Pakistan received approximately $1 billion in deferrals which were followed by Kenya and the Republic of Congo, said the report.

However, while countries under debt did secure a large number of deferrals in 2021, around the time that DSSI morphed into the G20’s Common Framework, it does not necessarily explain the significant drop in the value of China’s debt relief since.

China's loanwrite-offs

While the most visible action on debt relief since COVID-19 has been Beijing’s zero-interest loan write-offs, even those appear to be being slowed down, said the report. The Rhodium Group tracked 16 write-offs between 2021 and April 2023 all of which have taken place in African countries.

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During this time, the data collected by the Rhodium Group shows that the total value of write-offs from 2021-2023 was $231 million. “Fewer zero-interest loans will be available for China to write off in coming years, and they remain politically sensitive, limiting the rhetorical benefit to Beijing,” the report noted.

‘The Zambia Effect’

Earlier this month, Zambia reached a tentative restructuring deal with its creditors, which included China, which has opened up the door for global negotiations over debt relief to countries in financial distress. The report has called this change in China’s approach the “Zambia Effect”.

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This comes as a report citing outside analysts claimed that Chinese banks were not ready to accept either IMF debt calculations or haircuts on their substantial loans. While the tentative deal might provide some relief to Zambia, the negotiations with private creditors are still ongoing.

The deal in question also involves contingencies based on a review of Zambia’s progress. However, it remains to be seen if China’s changed approach in the Zambia negotiations will be carried forward in other cases.

(With inputs from agencies)

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