The Political Economy of China’s International Debt

• In Event: Sovereign Debt Dynamics: Regime Survival, Accountability, and Negotiations

Abstract

Over the last half-decade, China has become the world’s largest official creditor amid mounting
international debt difficulties. What is the relationship between China’s state-led finance and growing debt distress? This paper develops a theoretical framework for global financial statecraft. The traditional approach to sovereign debt sustainability, led by the IMF and Paris Club, emphasizes the short-term viability of sovereign borrowers by promoting financial disclosure and economic reform. China participates in such multilateral initiatives, signaling its willingness to be a global stakeholder, but often prefers maintaining bilateral discretion to avoid recognizing bad debts or requiring significant reform.

When do Chinese creditors choose bilateral discretion? This paper hypothesizes that China is more likely to negotiate bilaterally, when China has a high-level of financial statecraft, or a high-priority financial and commercial stake in its sovereign borrowers. Otherwise, when there is a low-level financial statecraft, where China invests in diplomatic prestige projects, overcapacity outlets, or basic infrastructure, China is more likely to participate fully in multilateral-led negotiations. To examine these patterns, this paper conducts a cross-national statistical test (1960-2021), finding that higher Chinese commercial conditions and value-added content leads to a greater prevalence of bilateral restructurings. In other words, China often extends a longer-term financial horizon for bilateral debt relief as leverage to maximize commercial conditions and improve its competitive position in key strategic sectors. These findings have important implications for the literature on the political economy of sovereign debt, financial globalization, and international development.

Author

• Stephen B. Kaplan, George Washington University