Why Beijing’s Belt-and-Road loans could cause harm

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by Hans Dembowski

IMF and China join hands to tackle looming debt problems

Last week, the International Monetary Fund (IMF) announced it will cooperate with the People’s Republic of China on training officials to deal with sovereign debt issues of other countries. This new initiative is interesting for several reasons.

First of all, it shows that the IMF appreciates China’s Belt and Road Initiative (BRI), which is designed to invest huge sums in the infrastructure abroad, particularly in Asia and Africa. Many western observes argue that the BRI serves to expand China’s influence around the world and should not be supported. I disagree. If the new infrastructure helps disadvantaged countries to prosper, it has merit and deserves support. This is quite clearly the stance taken by Christine Lagarde, the IMF’s managing director, in Beijing last week.

Second, the IMF leader pointed out inherent risks of the BRI. In particular, she warned that China’s partner countries may be taking on too much debt to fund the infrastructure projects. Quite obviously, Lagarde is doing her best to make China cooperate with – and perhaps even join – multilateral efforts to contain debt problems and ward off financial crises. This aspiration is healthy, and it seems that the Chinese authorities are interested in learning from IMF experiences. Why else would they set up a joint centre for capacity development?

Third, the debt risks are serious. Scholars from the independent Center for Global Development in Washington have assessed the matter in a study. They see eight countries headed for over-indebtedness, with BRI loans particularly contributing to the problems: Pakistan, Djibouti, the Maldives, Laos, Montenegro, Mongolia, Tajikistan and Kyrgyzstan.

I imagine that China will be willing to forgive some of the debt should it become unsustainable. It is true, after all, that the BRI serves geo-strategic purposes. Beijing is quite obviously prepared to invest money in efforts to forge lasting partnerships. Letting governments default does not serve this purpose.

On the other hand, China itself is a comparatively poor nation. No doubt, the leadership does not want to squander funds. Beijing’s diplomacy is nuanced, moreover. On the one hand, the People’s Republic is clearly claiming the status of a super power, on the other hand, it has a track-record of striving for something like good global citizenship. Cooperation with the IMF on matters related to government lending and sovereign debt fits all three policy priorities listed in this paragraph.

As the Financial Times, which uses a paywall, reports, teaching started at the China-IMF Capacity Development Center in the city of Dalian in March. By grasping this chance to cooperate with a difficult global partner, the IMF has made the right choice. This is especially true at a time in which the US administration is doing its best to cause insecurity about the future of the global multinational order.

 

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