China can promote sustainability in response to Covid-19 debt crisis
The economic impacts of the Covid-19 crisis have been felt most deeply in low- and lower-middle-income countries, particularly those dependent on commodity exports, which have suffered from demand shocks caused by blockages in rich countries and the global slowdown in trade.
As much as it has been a health crisis, the pandemic in the developing world has been an economic crisis for workers and a fiscal crisis for governments. The pandemic has become a critical moment for sovereign debt issues, as governments under fiscal pressure face the triple challenge of funding a public health response, protecting the domestic economy and workers, and repaying external debt.
More than 90 countries have approached the IMF for emergency assistance. Many more have requested debt relief through the G20 Debt Service Suspension Initiative (DSSI) and a few have requested debt restructuring through the G20 Common Framework for debt processing beyond the DSSI.
Debt crises risk setting low-income countries back years, limiting fiscal space for governments to deal with the effects of the pandemic, as well as to achieve longer-term prosperity and sustainability.
While both borrowers and lenders have a responsibility to ensure debt sustainability, China’s role here is important. As one of the largest bilateral lenders in the developing world, largely under the Belt and Road Initiative (BRI), Chinese lending has contributed significantly to debt. China has participated in both G20 multilateral debt initiatives, but a lack of transparency around its loans has hampered debt relief negotiations.
In climate-vulnerable countries, governments face an additional constraint: to finance crucial adaptation and resilience measures in the years to come, while facing increasing pressures to mitigate emissions and preserve fragile ecosystems.
The pandemic threatened to derail progress. However, climate change and debt relief may prove a rallying point and opportunity for coalition building and a new progressive agenda for a green recovery. Refinancing into new sectors, shaped by changing trade and investment patterns created by the pandemic, offers the opportunity to prioritize low-carbon, resilient and sustainable development approaches.
Financing China’s Global Development
Globally, Russia is the largest recipient of Chinese loans, while major BRI partners are also strongly represented, such as Pakistan, Laos, Sri Lanka, Turkmenistan and Kazakhstan. In Latin America, Chinese overseas development funding totaled $137 billion between 2005 and 2019, according to estimates from The Dialogue’s China-Latin America Finance Database and Boston University’s GDP Center. .
Many of the largest sovereign borrowers are resource exporters. In Latin America, US$62 billion went to oil-rich Venezuela alone. Argentina and Ecuador, two commodity exporters that are at different stages of negotiating sovereign debt restructuring with the IMF, were also the main beneficiaries, borrowing $17.1 billion and $18.4 billion respectively. of dollars.
of overseas Chinese loans for new energy capacity in 2020 went to unconventional renewables
Much of this lending is focused on infrastructure, particularly energy and transport: 67% of China’s total loan commitments have gone to the energy sector, which has historically favored high-emitting industries carbon and emitting greenhouse gases such as oil, coal and gas. Non-hydro renewables such as solar and wind have seen much less investment, although this is changing. In 2020, solar and wind financing accounted for 26% of total committed capacity, compared to only 10% for the period 2010-2019. With President Xi Jinping’s historic commitment in September 2021 to stop building coal-fired power plants overseas, we could see an acceleration in renewable energy investment.
In recent forums, Beijing has sought to demonstrate its solidarity with developing countries. During last week’s virtual ministerial meeting between China and the 33-member regional bloc of the Community of Latin American and Caribbean States (CELAC), Foreign Minister Wang Yi said China was ” ready to work with CELAC to stimulate the green transition of [the] the economy…and provide developing countries with increased support for emission reduction technologies and capacity building”.
More concretely, during the recent Forum on China-Africa Cooperation (FOCAC), the Chinese President pledged to reallocate to African countries $10 billion of his Special Drawing Rights (SDRs) – the international reserve asset of the IMF based on a basket of international currencies which since 2016 has included the Chinese RMB. This figure is equivalent to a quarter of the total and exceeded shares offered by France and the United Kingdom (20%) and the United States (18%), demonstrating a desire to go further. China has supported increasing SDR allocations since the start of the pandemic.
On debt relief, China’s approach has been more conservative. Although there is a persistent myth around “debt traps”, in reality asset foreclosures are highly unlikely, but so is outright debt cancellation or the use of debt-for-equity swaps. Only zero interest rate (ZIL) loans for 2020 and 2021 have been cancelled, representing a small fraction of total overseas loans.
Bilateral negotiations are the preferred channel and Chinese banks have renegotiated a series of debt relief measures with the various countries. This is most often to extend or defer repayment. Its participation in multilateral G20 DSSI initiatives has also been limited. The China Development Bank (CDB), for example, is excluded from the initiative as a “commercial” bank. However, the CBD has also shown some flexibility, repeatedly granting grace periods on loan repayments to Ecuador and Venezuela, most recently in 2020 as their economies floundered amid the pandemic. .
In a subset of countries where the proportion of debt repayments to China is high, China could play a key role, linking debt actions to broader climate and sustainability commitments.
Greening the BRI
There are clear synergies in China’s overseas development funding to support the climate agenda. Even before the pledge to stop overseas coal power, China had released several documents providing guidance on greening overseas investment. In October 2020, five key ministries and regulators issued guidance to promote climate investment on the Belt and Road, including encouragement to “formulate and revise international standards for climate investment and finance.”
The document is not legally binding, but it sets a new agenda for overseas investment, including encouraging financial institutions “to support low-carbon development of the belt and road and cooperation South-South” and suggesting that China should “regulate offshore investment and finance activities”. and managing climate risks.
Debt crises risk setting low-income countries back years, limiting governments’ fiscal space to deal with the effects of the pandemic
China’s global competitive advantage in renewable energy industries and its experience in developing them in the country gives it a clear opportunity to pioneer the expansion of renewable energy in developing countries to alleviate poverty and ensure a green transition. Chinese banks and enterprises can play an important role in this transformation.
Similarly, China could innovate in finance: pioneering approaches to sustainability-based debt relief programs, for example, where indebted countries are incentivized to create binding conservation targets , emission reductions or meeting their Nationally Determined Contributions (NDCs) in exchange for debt relief. These not only ease the budgetary pressure of debt repayment – since by creating greater capacity for growth, they increase the likelihood that future debt obligations will be honored – but also generate stable income streams over the long term. term for environmental projects because they work for the long term. life of a sovereign loan. This serves the interests of both the borrower and the creditor.
China’s stance on debt swaps is unclear and has yet to be tested for Chinese loans, but momentum is building in this area. Ecuador, for example, announced a 60,000 km2 reserve around the Galapagos Islands to mega-biodiversity during the COP26 climate negotiations. The marine park will be financed by a billion-dollar debt-for-nature swap, the largest in history, according to its government.
Academics and policy experts from several institutions in the United States and China have also championed debt-climate and debt-nature swaps to deal with the debt crisis caused by the pandemic. Although questions remain about their effectiveness, in a limited set of countries where debt and climate interests directly intersect, these could potentially have a significant impact. Borrowing countries should explore this crucial opportunity to link their debt and sustainability goals, and push Chinese partners on promises of sustainable investment and capacity building.
More than a decade ago, Chinese trade and investment in carbon-intensive and water-intensive commodities boosted many developing country economies during the last global recession. But the push toward innovative, nature-friendly financial tools, and the kind of leadership China has shown in reallocating shares of SDRs to developing countries, offer hope this time for a buoyant economic recovery. by greater environmental sustainability – and debt.