US Treasury official criticizes China’s “non-conventional” debt practices

Chinese yuan banknotes are shown in this illustrative photo taken on April 25, 2022. REUTERS/Florence Law/Illustration

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  • China is the largest official creditor in the world
  • Lack of transparency and confidentiality agreements under fire
  • Urging progress on Common Framework debt deals for Zambia and other countries

WASHINGTON (Reuters) – Senior Adviser to U.S. Treasury Secretary Janet Yellen warned on Tuesday that China’s slowdown in debt relief could burden dozens of low- and middle-income countries with years of debt servicing problems, low growth and a lack of investment. .

Brent Niemann, Yellen’s advisor, criticized China’s “non-conventional” debt practices and failure to move forward with debt relief at an event at the Peterson Institute for International Economics.

“China’s sheer size as a lender means that its participation is essential,” Nieman said in the letter, first reported by Reuters, citing estimates that China has $500 billion to $1 trillion in official loans owed, especially to low- and middle-income countries.

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Many of these countries are facing debt distress after borrowing heavily to combat COVID-19 and its economic fallout. The Russian war in Ukraine has now caused food and energy prices to soar, Nieman said, while higher interest rates in advanced economies have led to the largest net outflows of capital from emerging markets since the global financial crisis.

He said that the overall debt crisis has not materialized, but that economic pressures and domestic vulnerabilities are growing and may be exacerbated.

Niemann said China has a unique responsibility on debt issues as it is the world’s largest bilateral creditor, with claims that exceed those of the World Bank, the International Monetary Fund and all the official Paris Club creditors combined.

Niemann’s criticism of China’s debt practices represents the latest wave of Western officials and leaders of the World Bank and International Monetary Fund, tired of delays and deception with promises from China and private lenders. Read more

Niemann said 44 countries each have debt equal to more than 10% of their GDP to Chinese lenders, but Beijing has consistently failed to record debt when countries need help.

Instead, China chose to extend maturities or grace periods, and in some cases, like the Congo period in 2018, ended up increasing the net worth of its loans.

Niemann said China’s lack of transparency and frequent use of non-disclosure agreements has complicated coordinated debt restructuring efforts, and means that obligations to China are “systematically excluded” from multilateral monitoring.

Beijing signed on to the Joint Framework for Debt Remedies agreed by the Group of 20 major economies and the Paris Club in late 2020, but has delayed the formation of creditor committees for Chad and Ethiopia, two of the three countries that have requested assistance under the scope.

Nieman said in July that it said it and other official creditors would provide debt processing for the third, Zambia, but the delays have prolonged uncertainty and may discourage other countries from seeking help.

He said he hoped that Zambia’s creditors would be able to complete a memorandum of understanding by the end of the year.

All three cases must be resolved quickly, he said, adding that some middle-income countries such as Sri Lanka also need urgent debt restructuring.

Neiman warned that IMF financing should not be used by countries to pay off specific creditors, and called for more transparency in reporting and tracking of financing guarantees.

He noted that China engaged in “unconventional” practices that allowed the IMF to move forward without standard financing guarantees.

He cited China’s previous actions on Ecuador’s debt in 2020 and its refusal to restructure its debt service to Argentina, even though Paris Club creditors are likely to do so.

“In many of these cases, China is not the only creditor holding back the rapid and effective implementation of the model rules of the game (debt restructuring). But across the international lending landscape, China’s lack of participation in coordinated debt relief is the most common and most consequential.”

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(Andrea Shalal reports). Editing by Ana Nicholas da Costa

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