China ‘debt trap diplomacy’: ex-central bank governor slams accusations as a ‘smear’ amid warnings of global credit risks
- Former central bank governor Zhou Xiaochuan says Chinese lending has long-term economic benefits and is asked for by debtor countries
- The International Monetary Fund (IMF) and World Bank warned this week about record global debt levels, especially among poor nations
China’s overseas lending is not a “debt trap”, former central bank governor Zhou Xiaochuan has said, after two of the world’s biggest international financial institutions warned of growing credit risks in poorer countries as they struggle with the coronavirus and soaring food prices.
Speaking at the Boao Forum for Asia, Zhou acknowledged that some Chinese lending might not have always been “carefully designed” and poor communication has created problems.
But in general, it was not like the image portrayed by some media and countries, which amounted to a “smear” on China, he said.
“Most of [the lending] is for projects that companies in debtor countries have demanded, and at the same time they have economic benefits and are beneficial to the country in the long run,” Zhou told a panel discussion on China’s Belt and Road Initiative on Thursday.
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“There is a certain degree of difficulty in this process and it must be carefully considered and designed to find a way to alleviate the debt problems of the countries along the belt and road, while avoiding suggestions that there are bad motives.”
The Belt and Road Initiative, a globe-spanning infrastructure project introduced by President Xi Jinping in 2013, aims to connect Asia, Europe and Africa, while deepening economic integration and expanding China’s influence.
But it has also been blamed for rising debt in low-income countries due to costly projects that have strained finances.
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Zhou’s comments came after both the International Monetary Fund (IMF) and World Bank warned this week about record global debt levels, as rising inflation raises the cost of servicing loans.
“For low‑income countries, its burden has reached 50 per cent of gross domestic product, and that places 60 per cent of countries at or near debt distress,” said IMF managing director Kristalina Georgieva on Wednesday.
“In Sub‑Saharan Africa, 20 countries are in debt distress or very close to debt distress. With interest rates going up, this burden of debt is intolerable.”
Georgieva said the IMF would prioritise debt restructuring for countries and work with the Group of 20 (G20) on its Common Framework for Debt Treatments.
The G20 wealthy nations set up the common framework in late 2020 to help 70 countries in danger of default.
Under the scheme, participating countries were to agree to restructure debt with bilateral lenders and the IMF. The nations were then supposed to seek similar debt treatment from private-sector creditors.
So far only three countries – Chad, Zambia and Ethiopia – have sought help but not one has received any debt relief, even as the coronavirus has worsened their plight.
China, part of G20 and a significant lender to Sub‑Saharan Africa, has been blamed for not willing to take outright haircuts on debt.
Zhou said restructuring debt could allow some countries to better fight the pandemic but, in practice, not all would benefit from such measures.
“There may be such a thing in principle, but the actual implementation is not necessarily the same, because the pandemic situation in each country is different, and the situation of governance in each country is also different. So this needs to be evaluated,” said Zhou, who was the governor of People’s Bank of China (PBOC) between 2002-18.
There was “some distance” between the expectations of government officials and the reality in markets when it came to the G20 common framework, Zhou said.
“There are many demands on China [under the G20 common framework], because China is also a relatively large creditor,” he said. “You have to listen to the voices of the market and the debtor countries.”
Georgieva said on Thursday that China has committed to joining Zambia’s creditor committee, with PBOC governor Yi Gang intending to co-chair the group.
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“We were very pleased to hear from governor Yi Gang … a very specific commitment to join the creditor committee on Zambia and work expeditiously for debt resolution,” said Georgieva.
China and Chinese entities held US$5.78 billion of Zambia’s debt at the end of 2021, according to the most recent Zambian government data.
Additional reporting by Reuters
