US Treasury official criticizes China’s ‘unconventional’ debt practices

Chinese yuan banknotes are seen in this file photo taken April 25, 2022. REUTERS/Florence Lo/Illustration

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  • China is the world’s largest official creditor
  • Lack of transparency, confidentiality agreements under fire
  • Progress urges Zambia Common Framework debt agreements, others

WASHINGTON, Sept 20 (Reuters) – A top adviser to U.S. Treasury Secretary Janet Yellen warned on Tuesday that China’s delay in debt relief could saddle dozens of low- and middle-income countries with years of debt service problems, -low growth and insufficient investments.

Yellen’s adviser Brent Niemann criticized China’s “unconventional” debt practices and its inability to move forward with debt relief at an event at the Peterson Institute for International Economics.

“The sheer scale of China as a lender means that its involvement is essential,” Niemann said in the speech, first reported by Reuters, citing estimates that China has $500 to $1 trillion in outstanding official loans, mainly to countries with low and middle income.

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Many of these countries are facing debt difficulties after borrowing heavily to combat COVID-19 and its economic fallout. Now, Russia’s war in Ukraine has sent food and energy prices soaring, while rising interest rates in advanced economies have sparked the biggest net capital outflows from emerging markets since the global financial crisis, Niemann said.

He said a systemic debt crisis had not materialized, but economic stress and domestic vulnerability were growing and could worsen.

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

Asked about Niemann’s remarks during a regular media briefing, Chinese Foreign Ministry spokesman Wang Wenbin said Western trade and multilateral lenders are the main creditors of developing nations, not China.

“In recent years, the increasing debt of developing countries mainly comes from Western commercial creditors and multilateral institutions, and the long-term debt payments of developing countries are mainly directed to Western commercial creditors and multilateral institutions,” Wang said.

“The relevant remarks by the US are not in accordance with the facts.

Niemann’s criticism of China’s debt practices marks the latest salvo from Western officials and leaders of the World Bank and IMF, who have grown weary of delays and broken promises by China and private lenders. Read more

Each of the 44 countries owes debt equivalent to more than 10 percent of their gross domestic product to China’s creditors, but Beijing has consistently failed to write off debts when the countries need help, Niemann said.

Instead, China chose to extend maturities or grace periods, and in some cases, such as the one in Congo in 2018, even ended up increasing the net value of its loans.

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

Beijing signed the Common Debt Treatment Framework agreed by the Group of 20 major economies and the Paris Club in late 2020, but delayed the formation of creditor committees for Chad and Ethiopia, two of the three countries that sought aid under the frame.

In July, it said it and other official creditors would provide debt relief for the third, Zambia, but the delays have prolonged uncertainty and could discourage other countries from asking for help, Niemann said.

He said he hoped Zambia’s creditors could finalize 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.

Niemann warned that IMF funding should not be used by countries to pay off selected creditors and called for more transparent reporting and tracking of funding guarantees.

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

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

“In many of these cases, China is not the only creditor that is impeding the swift and effective implementation of a typical (debt restructuring) scheme.” But across the landscape of international lending, China’s lack of participation in coordinated debt relief is the most common and the most common consequence.”

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Reporting by Andrea Shallal; Additional reporting by Eduardo Baptista in Beijing; Editing by Ana Nicolaci da Costa and Kim Coghill

Our standards: The Thomson Reuters Trust Principles.

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