Abstract: China’s Belt and Road Initiative (BRI) is not a debt trap as errantly characterized by several western countries. On the contrary, at a time when the COVID-19 pandemic has aggravated the burden of many developing countries to repay principal and pay the interest so accrued, China is one of the countries that have actively initiated and participated in the G20 debt relief plan.
The current debt relief plan does not necessarily entail debt restructuring, debt reduction or cancellation after the pandemic. Rather, it is important to seek different solutions based on the debt situation of the related countries and distinguish which debt difficulties are caused by the pandemic. From China’s perspective, more emphasis will be placed on supporting connectivity under BRI so as to effectively “teach people how to fish” through building infrastructure capacity.
Some views hold that China’s massive investment in BRI is out of conspiracy given its low per capita GDP level. But the adoption of savings ratio to judge a country’s financing and fund allocation capabilities will refute the above conspiracy theory. A rising savings ratio is relatively evident in China and other East Asian countries, which have also constituted a main source of debt financing for the BRI. However, in the meantime, given an obvious decline in savings ratio among younger generations, China’s savings ratio will be further adjusted, affecting the future financing pattern of the BRI.
I. Pertinent solutions are called on concerning debt issues of Belt and Road countries
For the time being, the BRI, on the one hand, has continuously made significant progress, and been widely supported by developing countries. Especially during the pandemic, countries along the Belt and Road have responded and collaborated actively in the prevention and control of the pandemic. On the other hand, several western countries allege that the BRI is a debt trap and China’s conspiracy in attempting to control the related developing countries. By providing financing to them and then becoming their creditor, China will lure them into the debt trap.
At the moment, during G20 and other international conferences, the international community is engaged in heated discussions about how to deal with issues about developing countries’ high debt levels, esp. those concerning sovereign debts. There are different analyses and countermeasures for this issue. China has long advocated multilateralism, but whether consensus can be reached in the future direction of multilateralism is also on the top agenda.
First of all, the pandemic has indeed exacerbated the burden of many developing countries to repay principal and pay the interest so accrued. Recovery after the pandemic will not only depend on the developed nations, but also, to a large degree, on whether the emerging-market and developing countries can successfully overcome the pandemic and fulfill economic recovery.
As far as debt issues are concerned, during the pandemic, some low-income countries would have to reduce fund allocations to prevent and control the pandemic and see their disease prevention capability weakened if debt repayments ate into large amounts of fiscal resources. These issues will also affect the future development of developing countries after the pandemic, as their financing capacity will be curtailed. As for creditors, in the case of a default or debt restructuring, the financial health of financial institutions such as AIIB will be undermined, which will impact their future financing capacity, ratings and ability to serve the BRI. Therefore, the long-term effect of how the debt issues are handled also merits attention.
The recent meeting of G20 finance ministers and central bankers has revealed that China is actively initiating and participating in the G20 debt relief plan. The pandemic has led some economies to halt operation, which means some rents and principal repayment along with interest payment should also be suspended, and resume after the pandemic. But the development of the pandemic is quite complicated, with uncertainty about what things will look like after it. The current debt relief does not necessarily mean debt restructuring, debt reduction or cancellation after the pandemic, as it is essential to look further into the layers of relations concerned.
Moreover, it is important to distinguish which debt difficulties are caused by the pandemic. The real number of debt burdens increased due to the pandemic is not large, as many high-leverage and debt issues have already existed before. Attention should be paid to relevant moral hazards. As a result, it is difficult to find a uniform solution to debt burdens now; it is important to figure out corresponding solutions based on different debt situations of relevant countries. For the time being, some are keen on dealing with debt issues under a common framework, but I think such an approach will encounter many difficulties.
Furthermore, it is not true that relatively poor countries cannot effectively control the pandemic. Look at Southeast Asian countries, esp. Vietnam, Cambodia and Laos. The infection rate and death rate per one million people are very low. So far, Vietnam has recorded 1,148 infections and 35 deaths in total, equivalent to 12 infections and 0.4 death per one million people. The figures in Cambodia, Thailand and Laos are similar. What did the numbers tell then? If compared with average levels or with European countries, some of them only have extremely low infection rates. Therefore, pandemic prevention and control is not necessarily associated with the financial strength of countries. The key to pandemic prevention and economic recovery after it lies in identifying the right approach and relying on ourselves. If developed countries could effectively control their domestic pandemic situation, that would be the greatest support to developing countries.
Some developing countries attach great importance to the building of long-term capabilities after the pandemic, with a particular emphasis on connectivity, infrastructure and future production capacity. However, some countries are unwilling to default readily or apply for debt restructuring, for they take into consideration their future credibility and position in international markets and BRI cooperation, and hope they have stronger capabilities in the future. In the meantime, future development paths will depend highly on trade and investment liberalization as well as multilateralism. So, policy options at this moment are both critical and shall be far-sighted. Nevertheless, opposite to these practices is that some are trying to shirk past responsibilities by making use of this pandemic. They blame others and call them trap setters for their own problems, always mouth high-sounding words, claim to stand treat and waive old debts. But they do not want to pay the bill for their treat; instead, they want others to do so. That is why we see some of the phenomena worldwide.
Moreover, some media gives negative coverage of China. But in effect, China is not the biggest creditor for many developing countries. Meanwhile, both the Chinese government and its major financial institutions have proactively participated in the debt relief plan, with quite effective execution. Going forward, we need to consider what kind of roles our financial institutions and financial opening up shall play in the BRI.
II. BRI and global savings pattern
At this year’s annual meeting of IMF, Lawrence Summers, particularly from the angle of savings, made a point of using international savings to help emerging markets and developing countries with recovery after the pandemic, which is also very relevant to the BRI.
During the 2008 global financial crisis, then Fed Chairman Ben Bernanke looked at the subprime crisis from the savings perspective. He held that a global saving glut, esp. the surplus savings of China and other Asian countries flowing into America, led to the subprime crisis. That was because the dollar held the position of international reserve currency, and global savings flowed into America as they tended to seek havens. However, in my opinion, the main reason for Asian savings flowing into America was associated with the Asian financial turbulence in 1997, during which the hedge funds from developed countries impacted Asian markets. As a result, Asian countries had the motivation to expand exports and increase savings after their economies recovered.
A rising savings ratio is relatively evident in China and other East Asian countries, while the growth in savings has also become a key force for debt financing for BRI. Data show that, before the Asian financial turbulence, China’s savings ratio was around 35%; but the figure surged rapidly afterwards and hit a peak of 51.8% during the outbreak of the 2008 global financial crisis. The substantial rise in China’s savings ratio has generated great impact worldwide. But with the implementation of the policy to grow domestic demand, esp. the stress placed lately by President Xi Jinping on the role of domestic circulation (relative to international circulation), China saw its savings ratio dropping to 44.6% at the end of 2019, which might fall further. The impact of the pandemic on savings ratio is still unknown now; it could both increase and decrease savings, and hence needs close watching.
Compared with China, what is the global average savings ratio? In the past 10 to 20 years, the world’s average savings ratio was 26.5%, far lower than China’s level. Besides, some east Asian countries also recorded obviously higher levels. America was the major country with a savings ratio lower than the average, which was constantly below 10%. Saving is an important angle to judge a country’s financing and fund allocation capabilities; it is also a refutation of some conspiracy theories. Otherwise, some people will claim that given its relatively low per capita GDP, China’s massive investment in Belt and Road countries must be out of certain conspiracy.
Now, East Asia (including China) is a key force for debt financing. In the past, the main source of sovereign financing was the Paris Club, which has been overtaken by East Asia (including China) now in terms of total sovereign debts. In addition to BRI, China has also invested a considerable amount of capital in North America (including the United States) and Europe. But changes in the situation have made these countries bad-mouth China excessively and launch many unfriendly protectionist policies. In the coming couple of years, we shall pay heightened attention to BRI, which will remain a main force.
But in the long run, China’s savings ratio will change further. Guided by the development strategy of mainly relying on domestic circulation, complemented by international circulation, the former will become even smoother. Meanwhile, the savings ratio of the younger generation will decline markedly, which can help expand domestic demand; but it is also necessary to pay attention to over-borrowing, over-consumption and luxury consumption among young people. All in all, China’s savings ratio will be further adjusted, affecting the financing pattern for the BRI.
III. It is essential to emphasize “teaching people how to fish” during the Belt and Road cooperation
President Xi Jinping once emphasized that advancing Belt and Road cooperation is not about giving fish to people, but about teaching people how to fish. Currently, some stress the importance of distribution of benefits to or debt reduction and cancellation for developing countries, but the more crucial question lies in how to promote the macroeconomic development, facilitate infrastructure construction and boost production capacity of these countries, paving the way for long-term development.
Africa went through many rounds of food crises. Even now scenes of the World Bank and other organizations sending to and distributing food in Africa are still shown on the TV. This looked like an act of generosity, but some would criticize afterwards that they failed to teach African peoples to develop food production by utilizing their own resources and based on local conditions, and to produce food for transaction and circulation.
The pandemic is a similar case. When it comes to poverty reduction, many in the world will use high-sounding words. But what on earth does poverty reduction rely on? Does it rely on sending food, cancellation of debt, or capability building? China has achieved unprecedented results amid global efforts to get rid of poverty. What is China’s experience after all? To a great extent, it can be attributed to creating productivity, and building a path for the poor to make a living and become rich.
As an old Chinese saying goes, “Building roads is the first step to become rich,” which emphasizes infrastructure. Likewise, poverty reduction is not limited to transport, in addition to which there should also be electricity, power grids and other infrastructure, for Africa and many developing countries. This quite resembles the “infrastructure, fundamental industries and pillar industries” put forward then by the China Development Bank. From China’s perspective, more emphasis will be placed on supporting connectivity under the BRI so as to effectively “teach people how to fish” through infrastructure capacity building.
In these aspects, we, together with other emerging markets and developing countries, call for putting emphasis on multilateralism, trade liberalization, investment facilitation, international order and the role of the WTO. Only under such a circumstance can the potential formed through connectivity and capacity building by countries along the Belt and Road be brought into play worldwide. This is also a vigorous fight against the rising protectionism among some western countries.
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