Aid Is the Next Battleground Between China and the West

When around 50 country leaders gather in Paris on Thursday and Friday for the Summit for a New Global Financing Pact, the main question on their agenda is a familiar one: how to tackle climate change and global poverty. Yet the summit is less conventional than it first appears: France and Barbados, the event’s co-organizers, seek to advance these goals through new rules for restructuring developing countries’ debt, a prerequisite for giving them more fiscal space to help their populations. This focus is unusual, and it shows that aid is becoming the next battleground in the competition for global influence between China and the West.

Indebtedness in the global south has reached alarming levels in recent years. The trend emerged following the triple shock of the COVID-19 pandemic (which sank growth and fueled a rise in health care expenses), rising U.S. interest rates (which hit developing markets’ currencies and added to debt-servicing costs), and the war in Ukraine (which fueled a rise of commodity prices and thereby inflated the import bills of many developing countries). Just like a private household in dire financial straits, many of these countries had no option but to take out loans to stay afloat and keep paying their bills.

The problem is that many developing economies are now struggling to pay back their piled-up debt. Statistics are disturbing: The world’s 91 poorest countries are spending an average of more than 16 percent of their fiscal revenues on debt servicing, roughly a threefold rise compared to 2011. Some cases are jaw-dropping: Nigeria, for instance, spends approximately 96 percent of its tax receipts to service debt. Sky-high debt is fueling poverty: Because they spend so much on paying back lenders, many low-income countries have little left to finance education or health care. One data point says it all: Since 2020, African countries have spent more on debt servicing than on health care.

To make matters worse, a lot of this debt is owed to Beijing. Pakistan, Kenya, Laos, and several other developing countries owe more than 30 percent of their external debt to China. This is not surprising: China is today the world’s largest creditor, with a loan portfolio larger than those of the International Monetary Fund (IMF), the World Bank, and 22 major rich-country governments combined. African countries have been among the biggest recipients of Chinese money over the past decade: According to the China Africa Research Initiative, a research program at Johns Hopkins University, African countries signed up for Chinese loans totaling $153 billion between 2000 and 2019. (The exact amount may well be higher, given that around half of debt owed to China is not publicly reported.)

In theory, financial support from China should not be a problem; evidence of debt-trap diplomacy, whereby Beijing supposedly uses debt to seize poor countries’ resources and entrap them politically, is scarce. Yet it is clear that China is hardly the most flexible of creditors when developing economies struggle to repay loans. Zambia is a good example of this: In the 2010s, the country borrowed billions of dollars from China to finance infrastructure projects. Like many economies, Zambia was hit hard by the COVID-19 crisis. In 2020, at the height of the pandemic, the country asked China if it could suspend interest payments. China refused, leaving Zambia with no choice but to default on its debt—including nearly $7 billion owed to China. Zambia is no exception; the year 2022 recorded the highest-ever number of sovereign defaults. Experts fear there will be many more defaults by next year as repayment costs keep rising.

After many years of inaction, rich countries are finally striving to respond to China’s growing influence in the global south.

This backdrop is bleak, but it presents an opportunity for Western countries to benefit from growing resentment in the global south against Beijing’s lending practices. The two objectives of Western countries at the Paris summit this week are all about countering China. Their first goal will be a short-term one: ensuring that they have a seat at the negotiating table when emerging markets’ debts are restructured, even when Beijing is the lender. There is virtually zero chance that China would agree to cooperate with the Paris Club, the group of 22 rich countries that handles debt restructurings on behalf of official creditors. Instead, Western states will promote the G-20 Common Framework for Debt Treatment, a new policy tool that seeks to ensure that indebted countries are not left alone with China and can benefit from a G-20-designed set of common rules when they need to renegotiate their debts.

So far, this instrument has proved disappointing. Zambia was supposed to be a test case for the new arrangement, but debt restructuring negotiations have stalled. Beijing has a responsibility for this failure, since it refused to enter discussions, let alone make financial concessions, under the G-20 arrangement. Ethiopia and Ghana have also applied for the G-20 scheme, with a similar lack of results so far. By refusing to show some goodwill, China is making its stance clear: Beijing does not want the West to meddle in its financial affairs in developing economies. Instead of collaborating with the G-20 and working according to multilaterally agreed rules, China intends to control the process and renegotiate debts behind closed doors on a case by case, bilateral basis. That leaves indebted countries in a much weaker bargaining position.

For Western countries, focusing on debt restructuring is a smart strategy: At a time when their fiscal room for maneuver is limited, restructuring has no immediate impact on taxpayers and actually increases the chance that official lenders will get their money back. Rich countries also believe that now may be the perfect time to strike back against Beijing’s financial largesse, for two reasons. First, China is facing economic difficulties: The post-COVID rebound is disappointing, the financial sector is wobbling, and local governments are weighed down by debt. In light of these challenges, Beijing has focused its efforts on reviving the domestic economy at the expense of international outreach. Second, Beijing is facing a growing backlash in indebted countries amid fears of corruption and predatory lending. In Pakistan, for instance, these exact concerns sparked protests against a Chinese-backed port project earlier this year.

As a result of these factors, China’s formerly grandiose Belt and Road Initiative is now only a shadow of its former self. Beijing has downgraded its ambitions and pivoted toward “small and beautiful” investments abroad: As opposed to previous grand development schemes, these projects are of only short duration and focus on key natural resources and the transport infrastructure to access them. Data illustrates this pivot. Since 2019, developing countries have been repaying more money to Beijing than they have received in new Chinese loans.

Western countries hope that China’s difficulties will give impetus to their second, longer-term objective, which is to reassert the position of the World Bank and IMF as the world’s leading multilateral institutions for development finance. In doing so, the United States and the European Union want to undermine the competition from the two non-Western development banks headquartered in China: the New Development Bank (also known as the BRICS bank) and the Asian Infrastructure Investment Bank (whose Canadian global communications director has just resigned, citing alleged Chinese Communist Party interference). Curbing Chinese financing will be a key way to bolster the IMF’s global role. Data from Boston University shows that for each 1 percent of its GDP that a country borrows from China, it is 6 percent less likely to ask the IMF for a loan. One reason might be that Chinese money is pulling these countries closer into Beijing’s orbit and away from Western lenders.

There is a lot to do to revive multilateral lending. As a first step, Western countries hope that a reform of the IMF’s governance—which is also on the Paris summit’s agenda—can help address developing countries’ concerns over how the fund makes decisions. The IMF was created nearly 80 years ago, and voting rights in its decision-making bodies reflect the long-gone post-World War II economic landscape dominated by the United States and a handful of Western countries. The distribution of power within the IMF is no longer in line with current population figures or economic clout: Rich countries account for only about 15 percent of the world’s population and around 40 percent of global GDP in terms of purchasing power parity, but they hold about 60 percent of the IMF’s voting rights. Progress on IMF reform will be slow, though, as convincing Washington to give up voting shares will be easier said than done.

Like so many other summits, the Paris gathering will probably produce lots of cheery promises that will never be implemented in practice. But it may be the summit’s symbolic meaning that really matters. After many years of inaction, rich countries are finally striving to respond to China’s growing influence in the global south. This highlights how aid is fast becoming another battleground for influence between China and the West. The upshot is that low-income countries could well benefit from the trend, assuming that they are willing and able to seize this opportunity to play China and the West against each other.