China to Become Preferred Lender Over 'Washington Consensus' Banks as Debt Crisis Grows, Experts Say

Western media have slammed Chinese lending in the Third World as “debt trap diplomacy,” but its straightforward, no-strings-attached approach is only going to make it a more attractive lender as the global debt crisis grows, experts told Sputnik.

In a statement last week, the Group of Seven nations - a collection of rich, US-aligned powers - noted that “more than half of low-income countries” are “in debt distress or at high risk of debt distress” and called on “all relevant creditors, including non-Paris Club countries such as China,” to “contribute constructively to the necessary debt treatments.”

The People’s Republic of China is the world’s biggest bilateral creditor and a major lender for developing nations, especially under the framework of the Belt and Road Initiative infrastructure megaproject. Money from Chinese banks like the Export-Import Bank of China and the China Development Bank has helped finance solar, coal and hydroelectric power plants, airports and seaports, highways and high-speed rail lines across Asia, Africa, and even parts of Europe and Latin America.

Although the Western powers are now calling on China to help alleviate the debt crisis in those nations, they have cried foul in the past, accusing Beijing of what they call “debt-trap diplomacy.” They claim Beijing manipulates its lendees by inserting clauses that give it control over a nation’s assets, which it uses as leverage to force a pro-China stance from them on the international stage.

Ironically, it’s Western lenders like the International Monetary Fund (IMF) and World Bank [WB] that force nations to adopt neoliberal economic reforms rendering them unable to repay their loans, and insert confusing language into their deals - a political program known as the “Washington Consensus.” That means that, in the future, nations will increasingly prefer to do business with China instead of Western institutions, experts said.

Wall Street, London ‘Want a Default’

“China takes a different approach to its lending to other countries, especially the emerging markets, than, say, with the World Bank and International Monetary Fund,” Thomas W. Pauken II, a consultant on Asia-Pacific affairs and a geopolitical commentator and the author of "US vs China: From Trade War to Reciprocal Deal,” told Sputnik on Tuesday.

“The major difference is the political issues involved. A lot of times the IMF and WB place a lot of requests for reforms and to make a lot of structural changes to a country's economy. And a lot of times those structural reforms are not pragmatic or helpful to those countries. Therefore, China basically does loans more like a business person would. Is the country able to pay it back? If not, are these projects capable of generating revenues both for the country they're doing business in as well as for the Chinese investors,” he explained.

Pauken said Western “so-called tricky debt restructuring programs are actually schemes only that help Wall Street banks or London banks, because what they do is make their financing very complicated and very difficult for the recipient nations to understand.”

“They do this so that they can find ways to somehow create default mechanisms or put the recipient nations in a bad situation if they cannot make their payments properly. And also because of the complicated issues that they are putting into those finance mechanisms, a lot of times the recipient nations don't even know that they were following the requirements expected of them,” he explained. “And that is intended on purpose by a lot of these Wall Street and London banks, because they want a default, because it's quite possible they can either recoup any of their losses or force some type of situation where the governments have to repay everything and it could be a repayment in full.”

“What I'm trying to get at is that these complicated funding mechanisms are more intentional to create harm to, say, the emerging markets who are unfamiliar with these type of mechanisms,” he added.

'An Alternative That Respects Countries' Sovereignty'

Angelo Giuliano, a Hong Kong-based political and financial analyst, told Sputnik that “two worlds are colliding,” that of the Washington Consensus institutions and China, which “has another approach of loaning with no strings attached.”

He explained that the World Bank and IMF “make conditional loans at often higher rates and for the purpose of debt trap and push for political and economic reforms that often take place in the form of drastic privatizations and loss of sovereignty,” which work with Western so-called nongovernmental organizations (NGOs) to grease the wheels of regime change in those nations.

“While China has another approach of loaning with no strings attached, it is offering an alternative that respects countries' sovereignty and that is gaining political support and allies that are uniting in a single front against old imperialistic ways,” Giuliano said.

The Hong Kong-based expert explained that China uses BRI investment to “recycle” the US dollars from its huge trade surplus. Between that and buying up gold, Beijing is “furthering the demise of the dollar hegemony alongside Russia that has started to trade its commodities in rubles,” he said.

Beijing’s No Novice

Christopher Bovis, a professor of international business law at the University of Hull in the UK, told Sputnik it was “a myth” that China has no experience with comprehensive debt restructuring and sovereign credit re-evaluation - one that could give Western commentators and analysts a surprise.

“The basic strategies between China and western economies relating to sovereign debt and the availability of restructuring measures are similar apart from the speed of process of finalizing the deals and the ingredients of transparency and visibility in such processes,” he explained. “These shortcomings have an effect which does not allow for predictable outcomes, and as a result, the markets are not prepared for seamless debt restructuring in developing economies and emerging markets.”

He predicted that in the present crisis, “the slow speed of debt restructuring will take many people and institutions by surprise.”

Bovis said the Group of 20’s Common Framework introduced in late 2020 in response to nations like Zambia defaulted on their debt amid the pandemic-driven economic crisis “created a forum of competing interests with limited success in addressing the issue of predictable and swift sovereign debt restructuring and credit/bond facilities coordination. Many have blamed the economic effects of the pandemic spilling over in financial and economic diplomacy circles and paralyzing processes.”