Contrary to deliberate distortion, Chinese loans to low-income developing countries have benefited the recipients

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Developing countries are facing a pressing problem: a huge gap in development financing. To achieve the Sustainable Development Goals set by the United Nations, developing countries need substantial investments in infrastructure, food security, climate change, health and education. The funding gap is estimated at $2.5 trillion.

Meanwhile, UN statistics show that the external debt stocks of developing countries reached $11.4 trillion in 2022, more than double that recorded a decade ago. The debt burden is particularly heavy for developing countries, especially low-income ones.

The COVID-19 pandemic has made the situation even more challenging. According to the UN's Financing for Sustainable Development Report 2022, the poorest developing countries had to dedicate an average of 14 percent of their fiscal revenue to debt interest payments, nearly four times that of developed countries (3.5 percent). Globally, many developing countries have had to cut their education and infrastructure budgets to pay the debts.

In 2020, the G20 launched the Debt Service Suspension Initiative. From May 2020 to December 2021, the initiative suspended $12.9 billion in debt-service payments owed by 73 low-income countries to creditors, with China making the largest contribution. Following the initiative, the Common Framework for Debt Treatment was introduced by the G20 to help these countries restructure their debt and deal with insolvency and protracted liquidity problems.

In fact, China's lending to low-income developing countries soared after the global financial crisis. It has now overtaken the Paris Club members as the largest creditor to low-income developing countries.

Some scholars argue that China is repeating mistakes made by the West in the 1970s, wasting investment on "white elephant projects", such as unused ports, that bring no economic benefits. Others suggest that, compared with conventional creditors, China pays less attention to debtors' ability to repay, potentially harming their economic prospects and debt sustainability.

There are also people who claim that China's lending, led by the government and State-owned banks, is opaque, excessively commercialized and improperly managed. Some Western politicians even portray Chinese loans as a "debt trap", saying they are a diplomatic tool to force debtor countries to make unfair concessions when they cannot repay.

However, these assertions are misconceptions rather than facts. Empirical studies show that compared with loans from the United States and the World Bank, Chinese loans are more effective in promoting growth in recipient countries and demonstrate outstanding comparative advantages in bolstering industrial development. According to estimates by the Institute for World Economics and Politics at the Chinese Academy of Social Sciences, the initiation of a Chinese loan contract is associated with an increase in per capita GDP growth of 0.6 to 1 percentage point. In contrast, the growth effects of loans from the US and the International Development Association are not statistically significant. More surprisingly, the initiation of a loan contract with the International Bank for Reconstruction and Development is associated with a reduction in per capita GDP growth as much as 1 percentage point.

Chinese overseas loans provide large-scale, cost-effective and sustainable funding support for major infrastructure projects. The success of such debt financing cooperation between China and other developing countries are supported by Chinese firms' comparative advantages in infrastructure building, which not only deliver high quality projects in an efficient and affordable way, but also drive technology transfer, and boost local employment and improve human capital through localized operations.

Furthermore, inter-government cooperation under the framework of the Belt and Road Initiative has provided policy support and institutional safeguards for the success of relevant projects, with broader opportunities for regional economic development through enhanced connectivity.

To further enhance global debt finance cooperation, policymakers can consider the following policy reforms.

First, in order to address concerns about the lack of transparency in debt conditions between China and low-income developing countries, creditor committees could be established. Based on the principle of "one country, one strategy", the committee could serve as an appropriate and accessible institution for debt negotiations and subsequent debt management, increasing the efficiency of negotiation and enforcement.

Second, debtors should be permitted to adopt debt solution methods tailored to their own circumstances. On the one hand, traditional approaches such as debt suspension, debt reduction, interest rate reduction, interest cancellation and debt extensions can be implemented to alleviate the burden of debtors. On the other hand, more flexible and diverse strategies, such as bond issuing or loan-to-bond swap, should be considered to provide debtor countries with new liquidity and momentum for sustainable development.

The author is an academic member of the Chinese Academy of Social Sciences. The author contributed this article to China Watch, a think tank powered by China Daily.

Contact the editor at editor@chinawatch.cn