FT COMMENT: China needs to act as a responsible creditor
To lend for development is to take risk, but it is also to assess projects and fiscal positions rigorously and, when things go wrong, share in the losses
With power comes responsibility. China is already a great power, not least as a lender for development, notably in support of President Xi Jinping’s Belt and Road Initiative. Chinese institutions and multilateral bodies under its influence have become significant creditors of emerging and developing countries. This role can only grow.
How China handles it, not least how well it co-ordinates the management of lending and debt relief with the traditional creditors is increasingly important.
Christine Lagarde, MD of the International Monetary Fund (IMF), noted in Beijing at the beginning of April that "good infrastructure can help achieve more inclusive growth, attract more foreign direct investment and create more jobs". But, she added, it is vital to ensure that the Belt and Road "only travels where it is needed".
Furthermore, a combination of poor project selection with fiscal mismanagement in recipient countries, might "lead to a problematic increase in debt, potentially limiting other spending as debt service rises, and creating balance of payment challenges". In brief, it can all end in tears.
These warnings are to the point. To the counter that the record of lending by traditional donors and multilateral institutions is far from spotless, the response must be: precisely. Lessons have been learnt. It is not necessary for China to learn them all for itself.
How large are the risks? Two features of what is now happening matter.
First, Chinese lending is enormous. By the end of 2014, just two Chinese policy banks — the China Development Bank and Export-Import Bank of China had outstanding loans to foreign borrowers of nearly $700bn, much the same as the total outstanding lending of the World Bank and six regional development institutions. China has also set up two multilateral development banks — the Asian Infrastructure Investment Bank and the New Development Bank.
Second, as a study from the Center for Global Development notes, 23 of the 68 countries potentially eligible for lending under the Belt and Road Initiative are vulnerable to debt distress. In eight of these countries — Pakistan, Djibouti, Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan — the lending associated with the Belt and Road Initiative will add substantially to the risks.
This, then, is an accident waiting to happen. Moreover, these are not the only cases in which China has, or will have, a debt problem on its hands.
So what should Beijing do? First, agree and implement prudent lending standards. Traditional multilateral institutions should not associate themselves with the lending otherwise. Second, work out an approach to handling distress in China’s debtors. The Western forum for such discussions is the Paris Club. Ideally, China will be a full member of this group. At the least, it should co-ordinate its handling of bad debt with the Paris Club.
In 2005, Robert Zoellick, then US deputy secretary of state, called on China to become a "responsible stakeholder" in the global system. The fact that the US has largely abandoned this role does not make it less important for China to do so. One freeriding superpower is more than enough.
China needs to take a responsible approach to its role as a creditor. That does not mean it should be excessively risk averse. To lend for development is, quite properly, to take risk. But it is also to assess projects and fiscal positions rigorously and, when things go wrong, share in the losses, without imposing unduly onerous conditions. That is what a responsible creditor must do. China should show the way.
© The Financial Times 2018