How will China handle its EM debtors in virus crisis?

Hello from Brussels. Trade Secrets has been critical of the EU (not exactly to universal approbation from the institutions involved) for fuelling global protectionism with export restrictions on protective gear. So credit where it’s belatedly due: Brussels is following through with its original intention of relaxing (though not eliminating) those restrictions. Maybe by the next pandemic it will have a decent pan-EU procurement and stockpiling system in place. Hope springs eternal.

The big news in global governance is this weekend’s IMF/World Bank meetings and discussions on rescue lending and aid for poorer countries. Accordingly, our main piece today is on emerging market debt and China’s role as a creditor. The Tall Tale of Trade is why Donald Trump’s behaviour towards the World Health Organization mirrors that towards the World Trade Organization: analysis not 100 per cent wrong but actions hugely disproportionate. Our chart of the day looks at the fall in US tariff income.

China, the friendly neighbourhood debt collector

We’re straying towards the edge of our patch this week by looking at development through the lens of government finances rather than trade as such. But the debt burdens with which emerging economies come out of the pandemic will be a big deal for the future of globalisation. Not just that: since China as a huge creditor to developing countries is now intimately involved, it will also mean a lot for global governance.

We’ve said before that, unlike the 2008 global financial crisis, public finances in emerging markets went into the pandemic in a bit of a mess. As the disease spread, EMs had the highest ratio of debt service to GDP since 2005. And just as companies and workers have received huge state support in rich countries without much thought to moral hazard — governments didn’t prepare for a pandemic coming, so why should anyone else? — so it’s hard to make the argument that debt standstills or even write-offs will reward reckless behaviour from borrowers.

Yesterday, finance ministers from the G20, in one of their rare fits of constructive consensus, agreed a debt moratorium for 76 of the world’s poorest developing country governments until the end of the year.

The big achievement was to get China to sign up. China is a significant creditor to EMs. Much of its lending is opaque, but the Chinese state in one form or another is reckoned to have outstanding loans worth the equivalent of 5 per cent of global GDP, far in excess of the World Bank and other multilateral institutions or rich countries. So in any actual co-ordinated write-off of lending to low-income countries, still less to better-off EMs, it’s much less clear whether China will participate.

The transparent and systematic solution is for China to join the Paris Club of governments from rich creditor nations, which writes down debt according to negotiated formulas, or a similar association. But Beijing tends to argue that it’s sui generis as a creditor, being itself an EM lending to others as part of a comprehensive development strategy. This in itself can be problematic. Chinese lending to EMs is increasingly linked to its Belt and Road Initiative, projecting Chinese investment and political influence abroad even at the cost of building sub-par investment projects.

Beijing has always disliked joining organisations such as the Paris Club. The Obama administration tried putting pressure on Beijing to join, and it reckons it came fairly close. But Chinese exceptionalism won out. In any case, the baroque opacity of China’s lending — is a loan from a Chinese state-owned bank public debt if it was directed by government? — means it is tricky for Beijing even to participate in more informal writedowns.

China has sent vital PPE across the globe with an enthusiasm it previously reserved for pandas  © Richard Vogel/AP

There would, however, be a good geopolitical argument for doing so. China’s contention that it has a unique partnership of equals with its debtor countries may work well at times of relative prosperity. This is less likely to hold at a time when debt sustainability problems are spreading rapidly across the middle- as well as low-income world. While it doesn’t like being corralled into clubs it does not control, especially ones dominated by rich countries, nor does Beijing like being singled out and scapegoated. You can well imagine a spate of damaging stories about China extracting repayments from EMs hammered by the pandemic.

Beijing has worked hard during the crisis to appear as a leader in global governance. Constructively, China has sprayed PPE and ventilators around the world with an enthusiasm it previously reserved for pandas (less positively, it has indulged in some blatant point-scoring with regard to the US). It won’t want to waste that advantage by appearing to be the only major creditor putting the screws on developing countries in distress. 

In the meantime, the G20 has at least achieved a debt moratorium with broad support, which is more concrete than its usual vague exhortations of co-operation. It’s not exactly a bold new step into co-ordinated global governance, but in these disordered and dysfunctional times we’ll take what we can get.

Charted waters

US tariff income dropped in March to its lowest level in 18 months. A cut in the tariff rate for selected Chinese imports from February as part of the US/China phase-one trade deal played a role — but so did falling imports from China due to the coronavirus effect.

Tall tales of trade

Donald Trump’s suspension of funding to the WHO during the coronavirus emergency is a dramatic and destructive act © Mandel Ngan/AFP/Getty

Again pushing the definition of “trade” a bit, but bear with us. Trump’s suspension of funding to the WHO during a pandemic is a dramatic and destructive act. That is, after all, his brand. The thing is, though, he’s not entirely without a point. The WHO is flawed. Its desire to please China meant its leadership’s attitude to coronavirus was much too complacent early on. But responding by cutting off money during a crisis is like dealing with a toe abscess by amputating the leg. Nor was the WHO responsible for the US’s own woefully bad response.

Does this sound familiar? Yep, it’s a bit like the fate of the WHO’s geographical and nomenclatural near-neighbour in Geneva, the WTO. Some of the Trump administration’s criticisms of the institution and particularly its judicial over-reach make good points, though no one would claim the WTO is remotely as dysfunctional as the WHO. But jamming up the organisation’s dispute settlement system by refusing to appoint new judges is not exactly a proportionate response. If you want to reform an international institution, we don’t think a half-reasonable point used to justify an extravagantly venomous reaction is 100 per cent guaranteed to do the trick.

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Source: Economy - ft.com