This may not make much of a difference. Interest-free loans constitute only 2 to 3 percent of Chinese loans issued to Africa since 2000 and would have been the easiest for low-income countries to pay off. What’s more, interest will continue to accrue on the rest of these Chinese loans during the moratorium period, and it’s not clear whether all lower-income states will be able to pay back the loans.
China has been lukewarm toward further action, largely because of domestic politics. Here’s what you need to know.
1. State-owned banks are generally tough on debt obligations
When China does write off debt, it’s usually zero-interest loans handled by the Ministry of Commerce and the Ministry of Foreign Affairs, whose job descriptions include aiding friendly countries. The two ministries can write off debt without being judged harshly in the Chinese system, so Xi’s write-off of zero-interest loans is following a clear precedent.
But about 98 percent of Chinese international development lending accrues interest. The vast majority comes from state-owned banks with a mandate to earn a return, or at least to minimize losses. Two of these banks handle much of China’s international development business, and both rely partially on bonds for funding. Write-offs would put them in the awkward position of asking for government help to pay their own bondholders. In practice, the banks rarely do this.
2. Foreign aid can be controversial in China
Foreign aid can be controversial even in wealthier countries. China still has pockets of substantial poverty, especially in inland rural areas. After adjusting for differences in price levels, the poorest province of Gansu in 2018 had an income per capita of $8,151, or about the same as the Dominican Republic. For reference, Shanghai’s income per capita was $35,372, and the U.S. income per capita was $62,887.
Chinese citizens give foreign aid low priority — one study finds that on a scale of 1 (respondent supports prioritizing domestic development) to 10 (supports international development), the mean Chinese citizen scores a 2.7. The Chinese government has tried to overcome domestic reticence with “win-win” rhetoric — implying that Chinese firms profit from business deals that also benefit the host countries. A wave of debt write-offs during a global and domestic economic downturn would undermine this narrative.
3. Domestic constraints favor “flexible” repayments rather than write-offs
The Chinese government has typically preferred to show flexibility on repayment rather than formally renegotiate or write off debt contracts. One expert raises the example of Ethiopia, which has always paid debts to Europe on time but sometimes quietly falls behind on payments to China. The “flexible” option to informally postpone debts without any official announcement can give borrower countries space to recover without either side having to publicly admit that some projects are not panning out as hoped.
4. Resources, not cash, may be the key to repayment
By my calculations, between 29 and 32 percent of Chinese lending to developing countries since 2000 has been collateralized with natural resources. Borrowing countries in most cases repay these loans in oil, metals or agricultural commodities. With commodity prices at record lows because of the pandemic, these borrowers will probably struggle to produce enough to repay the loans. China’s flexible approach to repayment may allow countries to quietly fall behind in the knowledge that they might make up for it once prices recover. The continued flow of oil and other resources in the interim helps keep China’s large commodity firms afloat during a difficult period.
China almost never writes off resource-backed loans. The only possible exception to date is Sudan, which lost most of its oil with South Sudan’s independence. These types of loans typically come in multiyear packages ranging into the billions of dollars with longer-term implications for commodity markets. From China’s perspective, it makes little sense to write them off due to the shorter-term coronavirus shocks.
What will China do?
Caught between domestic and international pressures, China is likely to kick the can down the road as long as borrowers are not at imminent risk of default and other major creditors are not making commitments beyond the G-20 moratorium. Indeed, Xi’s promise to write off certain interest-free loans maintains flexibility as to which countries get relief and when.
One potentially complicating factor comes from the World Bank’s recent disclosure of outstanding debt payments due from 68 countries to major creditors, including China. The public disclosure of repayment schedules will make it more difficult for China and borrowers to informally ignore them, at least in these countries. This could force China into either forgiving more debt or allowing these countries to default.
But China may have other options. Multilaterally, China is the IMF’s third-largest shareholder and could work with other shareholders to provide IMF bailout money to those in greatest need. Bilaterally, Xi has mentioned extending the G-20-sponsored repayment moratorium for Chinese loans. Another option would be to issue new bilateral loans just to repay the old ones, as China did when economic disaster hit Venezuela in the mid-2010s. China could issue new loans at lower interest rates and include several years’ grace before repayment begins. This could buy borrowers time to ride out the pandemic without Chinese banks having to lose too much in the process. Expect more pragmatic deals to restructure debt, short of write-offs.